Podcast: Non-binding Guidance: The Defense Production Act and the COVID-19 Pandemic
This installation of Ropes & Gray’s podcast series Non-binding Guidance focuses on The Defense Production Act (DPA), a wartime production law that gives the president a broad set of powers to influence and mobilize domestic industry in the interest of national defense, and its implications for life sciences companies. Over time, Congress has expanded the DPA’s scope to include civil crises resulting from national disasters, terrorist attacks, and other national emergencies—most recently, the COVID-19 pandemic. In this episode, Ropes & Gray life sciences regulatory & compliance attorneys Beth Weinman and Jessica Band discuss the history of the DPA, how it has been used during the COVID-19 pandemic, and what use we can expect to see going forward. The discussion also addresses the specific authorities conveyed by the DPA, how to respond to issuance of a priority-rated contract and the scope of such contracts, and what opportunities may be provided by the DPA for life sciences companies.
Beth Weinman: Welcome to Non-binding Guidance, a podcast series from Ropes & Gray focused on current trends in FDA regulatory law, as well as other important developments affecting the life sciences industry. My name is Beth Weinman, and I am counsel in Ropes & Gray’s life sciences and regulatory compliance practice group based in Washington D.C. I am joined today by my colleague Jessica Band, an associate on the life sciences and regulatory compliance team based in California. On today's podcast, we will discuss the Defense Production Act (or DPA), its history, its use during the COVID-19 pandemic, and its implications for life sciences companies going forward. Jessica, can you give us a brief overview of the history of the DPA?
Jessica Band: Sure—thanks, Beth. The DPA is a wartime production law that gives the president a broad set of powers to influence and mobilize domestic industry in the interest of national defense. It was enacted in 1950 amid concerns about supplies and equipment during the Korean War, and was modeled on two World War II-era laws, the War Powers Act of 1941 and 1942. The original DPA gave the president a broad set of powers, including the ability to set wages and prices, as well as ration consumer goods, though not all of these powers have been renewed. Congress gradually expanded the DPA’s scope to include civil crises resulting from national disasters, terrorist attacks, and other national emergencies, which therefore includes today’s COVID-19 pandemic. The DPA has been reauthorized a number of times, most recently in 2019, and is set to expire in 2025. While the current pandemic is without precedent in many-many ways, modern American history includes a number of instances in which the DPA has been invoked in response to civil crises. For example, FEMA issued hundreds of contracts under the DPA in 2017 to facilitate disaster relief to Puerto Rico after Hurricane Maria.
Beth, can you unpack how the DPA is structured and its various authorities?
Beth Weinman: Sure. DPA authorities are generally conferred to the president, who then delegates those authorities to department and agency heads. There’s actually an Executive Order (E.O.), EO 13603 that outlines those relevant delegations. Now note, the DPA initially had seven separate sections or titles, four of which expired at the end of the Korean War. So today, only three of those original titles, which are now subchapters in the way that the statute is codified—each remaining title bestows slightly different authorities, and I’ll address them in turn. The DPA is actually codified in Title 50 of the U.S. Code, Chapter 55, sections 4501-4568.
The original Title I, which is the first subchapter in Title 50, Chapter 55, is known as the priorities and allocation authority, and this authority allows the president to compel businesses to accept and prioritize contracts for necessary materials, services, and facilities, and to allocate materials to promote the national defense. Under this authority, the president or a delegate can direct manufacturers to produce certain items, set aside productive capacity, or redirect the production or distribution of goods and services.
The original Title III, which is now Subchapter 2, authorizes the president to provide financial incentives—such as loans, loan guarantees, direct purchases or commitments—to incentivize domestic manufacturers to expand the supply of critical materials and products. This section’s authorities also include the ability to procure and install equipment in private industrial facilities to achieve necessary production goals. This section establishes a Treasury account, the Defense Production Act Fund, which is available to carry out the purposes of the section. Loans can be made under this section of the DPA on terms and conditions that the president deems necessary, except that they can only be extended to the extent that financial assistance is not otherwise available from private sources on reasonable terms. Ordinarily, outside the context of an emergency, loan making under this section also requires that the president make a number of other specific determinations that are outlined in Title 50 USC 4532(b)(2), but those determinations need not be made in the event of a national emergency that’s declared by the president or Congress. And, as everybody listening probably knows and as Jessica already eluded to, on March 13, 2020, by Proclamation 9994, then President Trump declared a national emergency concerning the COVID-19 pandemic. And, President Biden provided notice in late February 2021 that the emergency still continues. So those determinations are not necessary for loan making for the purposes of the current emergency.
Finally, the original Title VII, which is today’s Subchapter 3, provides a broader set of authorities. Among them, the president or a delegate can consult with private companies to develop voluntary collaboration agreements without risk of antitrust or other contractual liabilities. The president can also establish a volunteer pool of industry executives who can be called upon to serve the government in the interest of national defense. Importantly, the DPA provides limited immunity from liability for complying with DPA-related regulations. For example, if a priority-rated order causes a contractor to fall behind in fulfilling other orders, the contractor will be protected from actions for delay damages or breach of contract. The DPA also provides antitrust immunity to voluntary, agency-sponsored collaboration agreements. And there are penalties, it’s important to note, for not complying with the DPA, and they can be severe. Willful violations may be penalized by a $10,000 fine or not more than a year in prison, or both. And, the government can seek an injunction to enforce compliance with the DPA.
Now, Jessica, I’m going to turn to you to talk more in depth about priority-rated contracts and what life sciences companies should be on the lookout for.
Jessica Band: Thanks, Beth. Life sciences companies, including those companies in the vaccine distribution chain, could receive priority-rated contracts under the first section of the DPA. The first important question to answer is how to know whether the company has in fact received a priority-rated contract? The contract has to include four key elements: first, a priority rating; second, specific delivery quantities and dates (and on this note, terms such as “immediately” or “as soon as possible” do not constitute a delivery date—they’re just too vague); the third element is a statement identifying the governing regulation; and the final element is the signature of the contracting officer who is certifying the contract. Without one of these elements, the contract is not a valid priority-rated contract under the DPA. A priority-rated contract will be rated either DO or DX. DX contracts are the most important and have priority over DO contracts. Both DO and DX contracts have priority over unrated contracts. Most rated contracts carry the DO priority rating, so they’re by far the most prevalent. DX ratings require senior-level approval, such as approval by the HHS Secretary.
Once a company has determined that it has received a priority-rated contract, the second question is, whether the contract must be accepted by the company? In general, companies are required to accept priority-rated contracts if the company produces the item or provides the service, if normal terms of sale apply, and if the company can meet the required delivery dates. Additionally, a company cannot discriminate against rated orders in any manner, such as by charging higher prices or imposing different, more stringent terms or conditions. There are some limited reasons for rejecting an order, some are mandatory and some are discretionary. On the mandatory side, a company must reject the contract if it cannot fill the order by the specific delivery date or if the contract would interfere with a previously accepted DX or DO rated contracts. In both cases, however, the company must offer to accept on the earliest date on which delivery can be made. There are also discretionary reasons for rejecting a contract. A company may choose to reject the contract if the company cannot meet regularly established terms of sale. So if it’s necessary for the company to change out production lines such that a higher price would be charged, the company can discretionarily reject the contract. Other discretionary reasons for rejection include that the contract is for an item not supplied or a service not provided by the company, or that the contract is for an item produced only for the company’s own use for which no orders have been filled for the last two years.
The third important question to answer is how must a company respond now that this contract has been received? Generally, a company must reject or accept a rated contract or order, in writing, within 15 working days for DO rated contracts and 10 working days for DX rated contracts. So in other words, the company doesn’t have very much time to issue a response. If rejecting an order, a company must give reasons in writing for the rejection. And, if the delivery for an order will be delayed, the company must notify the government customer immediately and give the reasons for the delay, and also advise on a new shipment or performance date.
Beth, can you speak to how these contracts affect a company’s supply chain, because I know that’s a burning question for a lot of life sciences companies?
Beth Weinman: Sure—thanks, Jessica. It is important for companies to understand that priority-rated contract status flows through the entire supply chain, with each company responsible for extending the priority rating to its suppliers that are further down in the supply chain. Prime manufacturing companies are therefore required to compel their sub-contractors and suppliers to comply with the priority-rated contract. The DPA generally doesn’t apply to foreign companies and suppliers because priority-rated contracts have no legal authority outside of the United States. However, it is possible that a U.S. parent could be compelled to provide supplies manufactured by a foreign subsidiary because it has the ability to direct that subsidiary. Companies are therefore expected to know their supply chain, including normal lead times for foreign purchases and to make sure that they in fact do direct subsidiaries to comply. The Department of Defense has entered into arrangements with certain foreign countries as well, which allow the DoD to request priority delivery for its contracts, subcontracts, and orders from companies in those countries. For example, through bilateral security of supply arrangements, the DoD can request (and U.S. companies can request assistance in obtaining) priority delivery for DoD contracts, subcontracts, and orders from companies in Australia, Finland, Italy, Netherlands, Spain, Sweden, and the UK. And companies in the listed countries can request from DoD priority rating authority for items to be purchased in the United States.
Now we’ve walked through the history and statutory structure of the DPA—let’s turn to discussing how the DPA has been used in the COVID-19 pandemic. Jessica, can you discuss use of the DPA by the Trump administration?
Jessica Band: Sure, Beth. President Trump first invoked the DPA in the COVID-19 context in late March 2020 in an executive order, which now seems a very long time ago. The order authorized the federal government to make prioritization and allocation decisions for personal protective equipment (known as PPE) and ventilators. The order also delegated broad DPA authorities to the HHS Secretary with respect to all health and medical resources needed to respond to the COVID-19 pandemic. President Trump and various agency heads then expanded the use of the DPA in follow-on orders and directives in subsequent months. These follow-on measures were geared toward preventing hoarding of medical supplies, limiting export of crucial medical products, increasing domestic supply of masks and ventilators, and providing financial support and loans necessary for purchases of critical equipment. For example, FEMA issued an allocation order in April 2020 to prevent U.S. companies from exporting certain PPE. Such export restrictions are controversial, and this particular power had not been used since the Cold War. President Trump also engaged with General Motors to produce ventilators and with 3M to produce N95 respirator masks. In August 2020, the Trump administration invoked the DPA to expand coronavirus testing capacity. In total, the Trump administration invoked the authorities of the DPA close to 20 times. The focus really was to address issues that arose on the early side of the pandemic, such as shortfalls in PPE and ventilators, and expanding testing capacity.
Beth, can you talk about what use of the DPA has looked like thus far under the Biden administration?
Beth Weinman: Sure. On President Biden’s second day in office, he released a National Strategy to confront the COVID-19 pandemic promising to mount a strong federal response. Under this National Strategy, federal agencies were directed to use all appropriate authorities, including the DPA, to increase domestic manufacturing in four key critical sectors, and those sectors are: antigen and molecular-based testing; PPE and durable medical equipment; vaccine development and manufacturing; and therapeutics and key drugs. President Biden issued several executive orders related to the National Strategy, including an executive order on America’s supply chains, which was issued on February 24. And that order mandated a 100-day review of global supply chains used by key industries to avoid shortages of materials and supplies seen as critical during the pandemic. To the extent shortfalls are identified in that review, the heads of relevant agencies are instructed to take appropriate action using all available authorities, including the DPA to fill the shortfalls. The results of this review should become available any day, and in the aftermath of that, I expect we are going to get a much better sense from the administration of how it intends to use the DPA moving forward.
That being said, the Biden administration has taken or announced its intention to take several actions under the DPA in the past few months, and those have been widely reported in the press. For example, the administration announced its intention to issue DPA priority ratings for orders under contracts with Pfizer to alleviate bottlenecks in certain necessary supplies for vaccines. The administration also announced its intention to use the DPA’s financing authorities to increase COVID-19 testing capacity by contracting with six suppliers to build new factories and supply lines in the U.S. Additionally, the Biden administration announced that it had forged a collaboration between J&J and Merck to expand production of the COVID-19 vaccine. There will likely be additional uses of the DPA in the coming weeks.
We’re going to wrap-up this podcast with three key takeaways for life sciences companies. Jessica, could you discuss the first two?
Jessica Band: The first key takeaway is that life sciences companies should develop a process for receiving, processing, and responding to priority-rated contracts, and this process should really involve multiple functional groups. For example, legal personnel must be involved to determine that the contract or order is valid and meets all four elements that we discussed earlier—a formal legal determination is important for the company to correctly avail itself of the DPA’s liability protections. Additionally, purchasing personnel should be trained to include priority-rated contract information throughout the supply chain for lower-tier suppliers. Customer service personnel need to be able to manage relationships with commercial customers whose orders might be displaced by priority-rated contracts to head off litigation and to address bad feelings. The process should also address record-keeping requirements applicable to transactions covered by the DPA.
The second key takeaway is that life sciences companies should consider including language regarding priority-rated orders in contracts with downstream suppliers. This is particularly important because priority-rated contract status flows through the entire supply chain as previously discussed. Although U.S. companies will be required to prioritize the contract, such a provision would be particularly helpful for suppliers outside of the U.S. who are not legally bound to the provisions of the DPA. Life sciences companies could also consider including force majeure or excusable delay clauses in customer contracts to account for situations in which a company can no longer perform due to a DPA contract. To the extent existing customer orders will be impacted by DPA contracts, companies should also develop a communications plan to mitigate the impact on customer relationships.
Beth, can you discuss the third key takeaway and wrap-up the podcast for us?
Beth Weinman: The third takeaway is that life sciences companies should, and likely are, considering ways in which they can build out U.S. manufacturing capabilities or engage additional downstream suppliers to establish a more robust and diversified supply chain. Because the eligibility requirements for the loan program are broad, life sciences companies may want to consider whether to leverage the program to build out domestic manufacturing capabilities that will support the national response to the COVID-19 pandemic. This could be of particular value given the Biden administration, and the prior administration’s, increased focus on domestic production. In addition to building out domestic capabilities, life sciences companies should consider whether it would be beneficial to add alternative suppliers to their downstream supply chains. Without robust supply chains, companies may be unable to fulfill DPA orders or other customer orders due to resource constraints. Given the lead times necessary to identify and onboard additional suppliers, companies should prioritize evaluation of their supply chains to address any current or potential production bottlenecks.
Jessica, thank you for joining me today. And thank you to our listeners. For more information on this topic or others, please visit our website at www.ropesgray.com. And, of course, if we can help you navigate any of the topics we have discussed, please don't hesitate to get in touch. You can also subscribe to this series wherever you regularly listen to podcasts, including on Apple, Google and Spotify. Thanks again for listening.